Who Trades Tesla?

| About: Tesla Motors (TSLA)

My first three articles questioned Tesla Motors (NASDAQ:TSLA) valuation. They generated 848 comments - an astonishing number that clearly demonstrates the passions of both Tesla bulls and bears. The largest number of comments were from the proud owners of Tesla Model S and investors who believe in the future of electric vehicles. The very first comment summarized nicely the main opposition to my valuation thesis:

Andrei Volgin: go drive the car and then try again. You've got some decent points in there... but until you drive the car, you're stuck in the past.

It is a strange feeling for me to be accused of being "stuck in the past". I live in the house that had solar panels back in 1985. How about that for environmental credentials? I went on record to predict that most new cars will be electric within two decades. I made that claim before the first Model S rolled out from the factory, and I made it in a room full of top executives from the major oil companies. To my surprise, they did not object. Knowledgeable people accept that we are probably on the cusp of the biggest change in automotive technology in decades. Most people also agree that Model S is a fantastic car. It does not mean, however, that Tesla's stock is not going to experience wild swings that many individual investors may find hard to handle.

I believe that many Tesla fans fell victim to what psychologists call a confirmation bias. Everywhere they look Tesla owners rave about their cars, citing everything from its exceptional acceleration and unique design to large cargo volume, not to mention its key competitive advantage - it needs no gas. It seems logical to conclude that the incredible run in Tesla stock this year - from $35 in March to over $190 in September - is driven by the company's success. It is also easy to assume that the stock will continue to climb up as long the company keeps delivering on its promises.

Unfortunately for investors who believe in Tesla's bright future the fate of the stock is out of their hands. Look at the following chart, which shows the average daily dollar volume of trading in Tesla shares:

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The stock price moved up in April following real, tangible good news. This move attracted momentum traders. Between April and May the daily volume spiked from $200 million to $1.5 billion. In October it exceeded $2 billion per day.

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At this level all available shares in Tesla are being sold every 6 days. This is not a stock driven by happy Model S owners (pun intended). I am sure that a significant portion of this volume is generated by high-frequency and other algorithm-based trading programs that could not care less about the future of our planet or the prospects for electric cars. At this point all positive and negative news are greatly exacerbated by traders who follow technical indicators.

My short call on Tesla was based on its bubble-level valuation. Every new exciting technology leads to stock market bubbles regardless of whether this technology ultimately succeeds. Despite the 15% drop in the stock price since my first two articles, Tesla remains overvalued. We may see a bounce back up before or after the earnings announcement on November 5, but the probability of a further decline to a reasonable $45-60 level remains very high.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I closed my puts in TSLA on October 23, but I plan to reopen them at any moment prior to or immediately after the earnings announcement on November 5.